Monday, June 27, 2016

Master Direction- (Financial Services provided by Banks)



Unless otherwise specified, these directions shall not be applicable to overseas branches and subsidiaries of banks.

The ‘business of financial services’ shall mean –

a.     the forms of business enumerated in the Banking Regulation Act, 1949;
b.    the forms of business enumerated in Reserve Bank of India Act, 1934;
c.     business of credit information;
d.    operation of a payment system;
e.     operation of a stock exchange, commodity exchange, derivatives exchange or other exchange of similar nature;
f.      operation of a depository;
g.    business of a securitisation or reconstruction company;
h.   business of a merchant banker, portfolio manager, stock broker, sub-broker, share transfer agent, trustee of trust deeds, registrar to an issue, merchant banker, underwriter, debenture trustee, investment adviser and such other intermediary;
i.     business of a credit rating agency;
j.     business of a collective investment scheme;
k.   business of managing a pension fund;
l.     business of an authorised person; and
m. business as specified by Reserve Bank from time to time.

GENERAL GUIDELINES

Forms of Business:

(a)   Unless specified otherwise, a bank desirous of undertaking businesses permitted under the Banking Regulation Act, may do so either departmentally or through a separate subsidiary.

(b) An activity undertaken departmentally shall be subject to the following conditions:

i.          There shall be a policy for the activity including the various risks associated with it and suitable risk mitigation measures.

ii.         The guidelines on KYC/AML/CFT applicable to banks, issued by RBI from time to time, shall be complied with.

iii.         The general principles as enunciated in the Charter of Customer Rights issued by RBI shall be adhered to.

iv.         The specific conditions prescribed for the businesses shall be complied with in addition to the regulations of regulators.

v.          No bank shall engage in a financial activity other than those stated without the prior approval of RBI.

(c) A bank may also hold equity in both financial and non financial services companies within the limits specified under the Banking Regulation Act, and subject to the prudential limits on investments.

Prudential Regulation for Banks’ Investments:

Investment in a subsidiary or in a financial or a non-financial services company not being a subsidiary shall be subject to the following conditions:

(a)   Limits on investments by Banks:

i.          Equity investment, individually, shall not exceed 10 per cent of the bank’s paid-up share capital and reserves.

ii.         Aggregate of equity investment in factoring subsidiaries and factoring companies shall not exceed 10% of the bank’s paid up capital and reserves.

iii.         No bank shall contribute more than 49 per cent of the equity of Infrastructure Debt Fund set up as a NBFC.

iv.         A bank contributing less than 30 per cent of the equity of IDF-NBFC shall not be a sponsor.

v.          No bank shall –
a.     Hold more than 10% in the equity of a deposit taking NBFC. This does not apply to a housing finance company.

b.    Hold more than 10% of the paid up capital/unit capital of a venture capital fund / Category I Alternate Investment Fund.

c.     Hold more than 10% of the paid up capital of a company, not being its subsidiary engaged in non-financial services or 10% of the bank’s paid up capital and reserve, whichever is lower.

Investments in excess of 10% but not exceeding 30% shall be permissible in the following circumstances:

(i)   the investee company is engaged in non-financial activities permitted for banks; or
(ii) the additional acquisition is through restructuring of debt/ (CDR)/ (SDR), or to protect the banks’ interest on loans/investments made to a company. The bank shall submit a time bound action plan for disposal of such shares to RBI.

vi. The aggregate equity investments shall not exceed 20% of the bank’s paid-up share capital and reserves. For compliance with this limit, the following investments shall be excluded:

a.     investments held under ‘Held for Trading’ category that are not held beyond 90 days;

b.    investments in excess of 10% in non-financial companies acquired through restructuring of debt/ (CDR)/ (SDR), or to protect the banks’ interest on loans/investments made to a company.

(b)   Requirement for approval of Reserve Bank of India:

i.          investment in a subsidiary and a financial services company that is not a subsidiary. Prior approval shall not be necessary in the following circumstances:

a.     The investment is in a company engaged in financial services;

c.     The bank has made a profit and has a CRAR of 10% or more at the close of the  preceding financial year; and

d.    The shareholding of the bank, including the proposed investment is less than 10% of the investee company’s paid up capital; and

e.     The aggregate shareholding of the bank along with shareholdings, by its subsidiaries or joint ventures or other entities is less than 20% of the investee company’s paid up capital.

ii.         investment in a non-financial services company in excess of 10% of such investee company’s paid up share capital.


Procedure for Application:

A bank desirous of making an investment that requires prior approval shall make an application with the details of intended equity contribution, Board Note and Resolution approving the bank’s proposal and the details of bank’s existing equity contribution, to Reserve Bank of India.


Relationship with Subsidiaries:

Sponsor bank shall maintain an "arm’s length" relationship with its subsidiary and evolve the following supervisory strategies:
(a)  The Board of Directors of the Sponsor bank shall review the working of subsidiaries and undertake inspection/audit of its books at periodical intervals.

(b) The subsidiary shall not undertake any new business or set up another sudsidiary without prior approval of RBI.

(c)  The subsidiary shall not make any portfolio investment in another company for acquiring controlling interest, without prior approval of RBI. This shall not apply to the investments made by a VCF/AIF-I set up by a subsidiary.

(e)  A subsidiary shall not have any on-line access to customers’ accounts maintained with the bank.

(f)  The bank shall not grant any unsecured advances to the subsidiary without prior approval of the Reserve Bank.

(g) No preferential treatment shall be given to the subsidiary vis-à-vis a counterparty with similar risk characteristics.


FINANCIAL SERVICES UNDERTAKEN BY A BANK

Sponsoring of an Infrastructure Debt Fund (IDF)

IDFs can be set up either as a Mutual Fund (IDF-MF) or a NBFC (IDF-NBFC) subject to:

(a)  The bank shall have a Board approved limit for the exposure, including the exposure as a sponsor of IDF.

(b) The bank shall ensure that the IDF, while inviting investments, makes a disclosure that the sponsoring bank’s liability is limited to the extent of its contribution to the paid up capital.

Equipment Leasing and Hire Purchase Business

(a)  A bank intending to form a subsidiary for undertaking equipment leasing and hire purchase business shall be as mentioned in the General Guideline.
(b) Equipment Leasing and Hire Purchase business undertaken departmentally shall be subject to:

i.          Equipment leasing and hire purchase shall be treated at par with loans and advances and shall be subject to the prudential norms.
ii.         A bank shall not enter into leasing agreement with another equipment leasing company and other NBFC engaged in equipment leasing.

Factoring Services

(a)  A bank intending to form a subsidiary for undertaking factoring business shall be subject to the conditions mentioned in the General Guideline.

(b) Factoring business undertaken departmentally shall be subject to:

i.          Factoring services shall be provided on with recourse or without recourse or on a limited recourse basis.
ii.         All underwriting commitments pertaining to the credit risk on the debtor, under without recourse factoring, shall be in accordance with the Board approved limits.
iii.         A thorough credit appraisal of the debtors shall be carried out before entering into any factoring arrangement or establishing lines of credit with the export factor.
iv.         Factoring services shall be extended for invoices representing genuine trade transactions.
v.          Factoring shall be treated on par with loans and advances and shall be subject to prudential norms on loans and advances.
vi.         To avoid double financing, a mechanism for sharing information about common borrowers will be put in place. The bank shall obtain periodical certificates from the borrower about factored receivables. Factors shall also ensure to intimate the limits sanctioned to the borrower to the concerned banks. Information available on CERSAI shall also be considered.

Explanation: A common borrower is a person/entity who has availed a credit facility from a bank and is also the assignor under factoring arrangement.

vii.        Credit information regarding the non-payment of dues shall be furnished to the Credit Information Companies.

viii.        The exposure by way of factoring services shall be reckoned as under:

a.     Exposure shall be reckoned on the assignor for factoring on with-recourse basis.

b.    Exposure shall be reckoned on the debtor for factoring on without-recourse basis. Exposure shall be on the import factor in cases of international factoring.

c.     The exposure shall be reckoned on the ‘assignor’ or the ‘debtor’ or the ‘import factor’, for factoring on limited recourse basis, depending on the terms of agreement.

Primary Dealership Business

(a)            A bank intending to form a subsidiary for undertaking primary dealership business shall be required to be registered as an NBFC. The bank shall directly approach DNBR, RBI for the same.

(b)         Primary dealership business undertaken departmentally shall be subject     to the authorisation from IDMD. The bank shall directly approach IDMD for the same.

Underwriting Activities

A bank intending to engage in underwriting of issues of shares, debentures and bonds shall do so either departmentally or through a merchant banking subsidiary. This shall be subject to the General guidelines mentioned above.

Mutual Fund Business

(a)  No bank shall undertake mutual fund business with risk participation except through a subsidiary/joint venture.

(b) Where a sponsoring bank undertaking the mutual fund business lends its name to the bank sponsored mutual fund, a suitable disclaimer clause shall be inserted while publicising new schemes to the effect that the bank is not liable or responsible for any loss or shortfall resulting from the operations of the scheme.

Insurance Business

(a) No bank shall undertake insurance business with risk participation except through a subsidiary/joint venture, subject to:

i.          It has a networth of Rs.1000 crore and its minimum net worth shall not be less than Rs.500 crore after investing in the equity of such company;
ii.         Its CRAR is not less than 10 per cent after investment;
iii.         Its level of net NPA is not more than 3%;
iv.         It has made a net profit in the preceding three financial years; and
v.          The track record of the performance of its subsidiaries, if any, is satisfactory.

(b) Bank shall set up a subsidiary/joint venture company for undertaking insurance broking and corporate agency only if:

i.          Its net worth is not be less than Rs.500 crore after investing in the equity of such company;

ii.         It complies with conditions stated (a) ii, iii, iv and v above.

(c) A bank may act as an insurance broker departmentally subject to the conditions mentioned on insurance agency business.

Pension Fund Management by Banks

No bank shall undertake the business of pension fund management except through a subsidiary set up for the purpose, subject to:

i.          Its net worth shall not be less than Rs.500 crore after investing in the equity of such company;
ii.         Its CRAR is not less than 10% after investment;
iii.         Its level of net NPA is not more than 3%;
iv.         It has made a net profit in the preceding three financial years; and
v.          The track record of the performance of its subsidiaries is satisfactory.

Investment Advisory Services

No bank shall undertake the business of investment advisory services (IAS) except through a separate subsidiary set up for the purpose or one of its existing subsidiaries, subject to:

i.          Specific prior approval shall be obtained before offering IAS.
ii.         IAS shall be provided only for products and services in which banks are permitted to deal in as per the Banking Regulation Act, 1949.

A bank presently offering IAS shall reorganise its operations in accordance with these Directions latest by April 21, 2019.

Portfolio Management Services

(a)  No bank shall start or introduce any new portfolio management service (PMS) or similar scheme or set up a subsidiary for the purpose without the approval of RBI.

(b)   A bank already undertaking PMS departmentally as on the date of these Directions shall ensure compliance with the following conditions:

i.          PMS shall be in the nature of investment consultancy/management, for a fee, entirely at the customer's risk without guaranteeing, either directly or indirectly, a pre-determined return.
ii.         The fee charged shall be independent of the return to the client.
iii.         Funds shall not be accepted for portfolio management for a period less than one year. In case of placement of funds by the same client on more than one occasion, each placement shall be treated as a separate account.
iv.         Funds accepted for portfolio management, shall not be entrusted to another bank for management.
v.          Portfolio funds shall not be deployed for lending in call money/bills market, and lending to/placement with corporate bodies.
vi.         The bank providing PMS shall maintain client wise account of funds, and all credits and debits shall reflect in such account.. The account holder shall be entitled to get a statement of his portfolio account.
vii.        The bank’s own investments and investments belonging to the PMS clients shall be kept distinct from each other. Transactions between the bank’s investment account and portfolio account shall be strictly at market rates.
viii.        The bank shall maintain a ‘Clients’ Portfolio Account’ in its general ledger, reflecting the funds received by it for portfolio management. The balance lying in this account shall be treated as outside borrowings of the bank and it shall maintain CRR/SLR on such funds. The bank’s liability to its clients shall be properly reflected in the bank’s published books of accounts.
ix.         There shall be a clear functional separation of trading and back office functions relating to banks' own investment accounts and PMS accounts.
x.          PMS accounts shall be subjected by banks to a separate audit by external auditors.

(c)  The aforesaid conditions shall, mutatis mutandis, be applicable to the subsidiaries of banks as far as they are not contradictory to regulations of RBI or SEBI, governing their operations.

Agency Business by Banks:

(a)  Agency business shall be undertaken only for the products and services in which a bank is permitted to deal in as per Banking Regulation Act.

(b) The service shall be provided at a fee, without any risk participation.

(c)  Agency business of mutual fund companies undertaken departmentally shall be subject:

i.      The investors’ applications for any transaction shall be forwarded to the mutual funds/registrars/transfer agents.
ii.    The purchase of units shall be at the customers’ risk without the bank guaranteeing any assured return.
iii.  No mutual fund units shall be acquired from the secondary market or bought back from a customer for selling it to other customers.
iv.  Extension of credit facility to individuals against the security of mutual fund units shall be in accordance with the Master Directions on Credit Management.
v.    A bank shall keep the investments of the customers distinct from its own investments.

(d) Corporate agency of insurance companies undertaken departmentally by banks shall be subject:

i.          There shall be a Board approved policy encompassing the model of insurance distribution, issues of customer appropriateness, suitability and grievance redressal.
ii.         The deposit to be maintained by an insurance broker as per the IRDA, shall be maintained with a scheduled commercial bank other than itself.
iii.         The bank shall ensure customer appropriateness and suitability as under:

a.     All employees dealing with insurance business shall possess the requisite qualification prescribed by IRDA.
b.    There shall be standardised system of assessing the suitability of products for a customer and the transaction processes shall be segregated. Products with investment components shall require the bank to necessarily undertake a customer need assessment prior to sale whereas pure risk term products with no investment or growth component shall be deemed as universally suitable products.
c.     The bank shall treat its customers fairly, honestly and transparently, with regard to suitability and appropriateness of the insurance product sold.

iv.         It shall be ensured that performance assessment and incentive structure for staff is not violative of the BR Act, or the guidelines issued by IRDA. It shall also be ensured that no incentive is paid to the staff engaged in insurance services by the insurance company.

v.          The bank shall not force a customer to opt for products of a specific insurance company or link sale of such products to any banking product. It shall be stated in all publicity material that the purchase of any insurance products is purely voluntary.

vi.         A robust internal grievance redressal mechanism shall be put in place for resolving issues related to services offered. It shall be ensured that the insurance companies whose products are being sold also have robust customer grievance redressal arrangements. The bank shall facilitate the redressal of grievances.

Referral Services

Banks shall offer referral services only for financial products other than insurance, on a non-risk participation basis.

Retailing of Government Securities

Banks can undertake business of retailing of Government Securities only with non-bank clients subject to the Directions issued by RBI.

Membership of SEBI approved Stock Exchanges

(a) No AD Category I scheduled commercial bank shall become a trading/clearing member of the currency derivatives segment of the SEBI recognised stock exchanges unless -

i.          It has a minimum net worth of Rs.500 crore;
ii.         Its CRAR is not less than 10%;
iii.         Its net NPA does not exceed 3% and
iv.         It has made a net profit in the preceding three financial years.

A bank not meeting the aforesaid conditions may participate in the currency futures market as a client.

A bank that is a trading/clearing member shall keep its own and its clients’ position distinct from one another.

(b) A bank which intends to become a member of a SEBI approved stock exchange for the purpose of undertaking proprietary transactions in the corporate bond market shall do so, subject to satisfying the membership criteria of the stock exchanges and complying with the regulatory norms laid down by SEBI and the respective stock exchange.

EXEMPTIONS, INTERPRETATIONS AND REPEAL
Exemptions

RBI may grant extension of time to comply with or exempt any bank from the provisions of these Directions either generally or for any specified period, subject to conditions as it may impose.

Interpretations

RBI may issue necessary clarifications in respect of any matter covered herein and the interpretation given by it shall be final and binding on all the parties concerned.

Based on RBI circular dated 26/05/2016. For any further clarification, please refer www.rbi.org.in …….Poppy